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Local government responsiveness to federal transfers: theory and evidence

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  • Rizzo, Leonzio

Abstract

Federal transfers can depend on local fiscal capacity which is measured by local tax bases. The aim of this paper is to understand to what extent and how these transfers affect local tax decisions. We develop a model with two provinces producing one mobile good. The good is taxed according to the destination principle. Final consumers decide to buy the good from the province where it is cheaper. The two provinces engage in tax competition. The introduction of scale economies into the shopping technology generates nonlinear tax reaction functions which make it possible to test the effect of a transfer equalizing local tax bases on tax competition in two complementary tax regimes. Used for this purpose are cigarette and gasoline tax data from Canada. In the case of cigarette tax it is found that nonlinearity in tax competition is almost entirely offset when equalization holds: tax competition in the two tax regimes become closer. The shopping technology for gasoline gives less scope for scale economies, so that equalization does not affect reaction functions.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5373.

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Date of creation: Jun 2006
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Handle: RePEc:pra:mprapa:5373

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Keywords: fiscal competition; equalization; transfer; externality; tax-rate;

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References

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  1. Valentino Larcinese & Leonzio Rizzo & Cecilia Testa, 2005. "Allocating the US federal budget to the states: the impact of the President," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3611, London School of Economics and Political Science, LSE Library.
  2. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1210-1235, June.
  3. Ravi Kanbur & Michael Keen, 1991. "Jeux Sans Frontieres: Tax Competition and Tax Coordination when Countries Differ in Size," Working Papers, Queen's University, Department of Economics 819, Queen's University, Department of Economics.
  4. Sam Bucovetsky & Michael Smart, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series 767, CESifo Group Munich.
  5. Marko Köthenbürger, 2002. "Tax Competition and Fiscal Equalization," International Tax and Public Finance, Springer, Springer, vol. 9(4), pages 391-408, August.
  6. Tim Besley & Harvey S. Rosen, 1997. "Vertical externalities in tax settings: evidence from gasoline and cigarettes," IFS Working Papers, Institute for Fiscal Studies W97/23, Institute for Fiscal Studies.
  7. Alejandro Esteller & Albert Solé, 2001. "Tax Setting in a Federal System: The Case of Personal Income Taxation in Canada," Working Papers 2001/9, Institut d'Economia de Barcelona (IEB).
  8. Mintz, Jack & Tulkens, Henry, 1986. "Commodity tax competition between member states of a federation: equilibrium and efficiency," Journal of Public Economics, Elsevier, Elsevier, vol. 29(2), pages 133-172, March.
  9. Kimberley Scharf, 1999. "Scale Economies in Cross-Border Shopping and Commodity Taxation," International Tax and Public Finance, Springer, Springer, vol. 6(1), pages 89-99, February.
  10. Amrita Dhillon & Myrna Wooders & Ben Zissimos, 2007. "Tax Competition Reconsidered," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(3), pages 391-423, 06.
  11. Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 40(3), pages 782-811, August.
  12. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 34(2), pages 481-503, May.
  13. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 31(1), pages 189-206, February.
  14. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  15. John FitzGerald & Justin Johnston & James Williams, 1995. "Indirect Tax Distortions in a Europe of Shopkeepers," Papers, Economic and Social Research Institute (ESRI) WP056, Economic and Social Research Institute (ESRI).
  16. Friberg, Richard & Asplund, Marcus & Wilander, Fredrik, 2005. "Demand and Distance: Evidence on Cross-Border Shopping," Working Paper Series in Economics and Finance 587, Stockholm School of Economics.
  17. Marie C. Thursby & Jerry G. Thursby, 1994. "Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Government Intervention," NBER Working Papers 4763, National Bureau of Economic Research, Inc.
  18. Heyndels, Bruno & Vuchelen, Jef, 1998. "Tax Mimicking Among Belgian Municipalities," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 89-101, March.
  19. Jan K. Brueckner & Luz A. Saavedra, 2000. "Do Local Governments Engage in Strategic Property-Tax Competition?," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0357, Econometric Society.
  20. Craig Brett & Joris Pinkse, 1997. "Those Taxes are all over the Map! A Test for Spatial Independence of Municipal Tax Rates in British Columbia," International Regional Science Review, , , vol. 20(1-2), pages 131-151, April.
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Citations

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Cited by:
  1. Alejandro Esteller-More (Universitat de Barcelona) & Leonzio Rizzo (Universita di Ferrara), 2009. "(Uncontrolled) Aggregate shocks or vertical tax interdependence? Evidende from gasoline and cigarettes," Working Papers in Economics, Universitat de Barcelona. Espai de Recerca en Economia 233, Universitat de Barcelona. Espai de Recerca en Economia.
  2. Rizzo Leonzio, 2006. "Le inefficienze della competizione fiscale: una rassegna dei principali modelli teorici," Economia politica, Società editrice il Mulino, Società editrice il Mulino, issue 1, pages 89-120.
  3. Christos Kotsogiannis, 2007. "Federal Tax Competition and the Efficiency Consequences for Local Taxation of Revenue Equalization," Discussion Papers, Exeter University, Department of Economics 0701, Exeter University, Department of Economics.
  4. Karkalakos, Sotiris & Makris, Miltiadis, 2008. "Capital Tax Competition in the European Union: Theory and Evidence from Two Natural Experiments," MPRA Paper 21437, University Library of Munich, Germany, revised 2010.

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